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In the 20th century it became common during December in large shops or department stores to have a "cavern" in which an actor dressed up as Santa Claus would give gifts to children. Grottos can be large walk-through fantasy cavern-like areas incorporating animatronic characters such as elves and pantomime characters. This tradition started in Britain in 1879 and then extended in the 1890s to Australian and American department stores seeking to attract customers.

The world's first Christmas grotto was in Lewis's Bon Marche Department Store in Liverpool, England. The grotto was opened in 1879, entitled "Christmas Fairyland". A staple of Liverpool's festive season, many generations first visited Father Christmas here, with the final displays covering over 10,000 square feet (930 m2). The Grotto has now moved to Rapid Hardware’s store in the former George Henry Lee (John Lewis) building.

In Adelaide, South Australia, the first "Magic Cave" was set up in 1896 at the John Martin's department store on Rundle Street. An annual store-sponsored parade, Adelaide Christmas Pageant, was initiated in 1933 during which Father Christmas was conducted to the Magic Cave to formally herald the holiday season. Since the closure of John Martin's, the David Jones stores, have continued the tradition of the Magic Cave but no where near to the extent John Martin's did, in Adelaide as well as in other Australian capitals while the annual South Australia parade marked its 75th anniversary in 2007.

Nowadays department stores and shopping centres in the UK still host Santa's Grottos.

It is traditional that the children receive a toy from Father Christmas upon visiting his Grotto be it in a shopping mall or a little garden centre. Grottos are sometimes free and sometimes they charge parents to let their kids see Santa and receive a surprise gift.